This document provides solutions to end-of-chapter problems from several finance-related chapters. The problems solved include calculations related to capital budgeting, risk analysis, capital structure, derivatives, and multinational finance. Equations and numerical calculations are shown to arrive at solutions such as NPV, WACC, leverage ratios, exchange rates, and currency conversions. Financial calculators are also referenced as tools used to solve some of the problems.

1. Chapter 10
The Basics of Capital Budgeting
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
10-1 a. $52,125/$12,000 = 4.3438, so the payback is about 4 years.
b. Project K's discounted payback period is calculated as follows:
Annual Discounted @12%
Period Cash Flows Cash Flows Cumulative
0 ($52,125) ($52,125.00) ($52,125.00)
1 12,000 10,714.80 (41,410.20)
2 12,000 9,566.40 (31,843.80)
3 12,000 8,541.60 (23,302.20)
4 12,000 7,626.00 (15,676.20)
5 12,000 6,808.80 (8,867.40)
6 12,000 6,079.20 (2,788.20)
7 12,000 5,427.60 2,639.40
8 12,000 4,846.80 7,486.20
The discounted payback period is 6 +
60.427,5$
20.788,2$
years, or 6.51 years.
Alternatively, since the annual cash flows are the same, one can divide $12,000 by 1.12
(the discount rate = 12%) to arrive at CF1 and then continue to divide by 1.12 seven more
times to obtain the discounted cash flows (Column 3 values). The remainder of the
analysis would be the same.
c. NPV = -$52,125 + $12,000[(1/i)-(1/(i*(1+i)n
)]
= -$52,125 + $12,000[(1/0.12)-(1/(0.12*(1+0.12)8
)]
= -$52,125 + $12,000(4.9676) = $7,486.20.
Financial calculator: Input the appropriate cash flows into the cash flow register, input I
= 12, and then solve for NPV = $7,486.68.
d. Financial calculator: Input the appropriate cash flows into the cash flow register and
then solve for IRR = 16%.

2. e. MIRR: PV Costs = $52,125.
FV Inflows:
PV FV
0 1 2 3 4 5 6 7 8
| | | | | | | | |
12,000 12,000 12,000 12,000 12,000 12,000 12,000 12,000
13,440
15,053
16,859
18,882
21,148
23,686
26,528
52,125 MIRR = 13.89% 147,596
Financial calculator: Obtain the FVA by inputting N = 8, I = 12, PV = 0, PMT = 12000,
and then solve for FV = $147,596. The MIRR can be obtained by inputting N = 8,
PV = -52125, PMT = 0, FV = 147596, and then solving for I = 13.89%.
10-3 Truck:
NPV = -$17,100 + $5,100(PVIFA14%,5)
= -$17,100 + $5,100(3.4331) = -$17,100 + $17,509
= $409. (Accept)
Financial calculator: Input the appropriate cash flows into the cash flow register, input I
= 14, and then solve for NPV = $409.
Financial calculator: Input the appropriate cash flows into the cash flow register and then
solve for IRR = 14.99% ≈ 15%.
MIRR: PV Costs = $17,100.
12%

3. FV Inflows:
PV FV
0 1 2 3 4 5
| | | | | |
5,100 5,100 5,100 5,100 5,100
5,814
6,628
7,556
8,614
17,100 MIRR = 14.54% (Accept) 33,712
Financial calculator: Obtain the FVA by inputting N = 5, I = 14, PV = 0, PMT = 5100,
and then solve for FV = $33,712. The MIRR can be obtained by inputting N = 5, PV = -
17100, PMT = 0, FV = 33712, and then solving for I = 14.54%.
Pulley:
NPV = -$22,430 + $7,500(3.4331) = -$22,430 + $25,748
= $3,318. (Accept)
Financial calculator: Input the appropriate cash flows into the cash flow register, input I
= 14, and then solve for NPV = $3,318.
Financial calculator: Input the appropriate cash flows into the cash flow register and then
solve for IRR = 20%.
MIRR: PV Costs = $22,430.
FV Inflows:
PV FV
0 1 2 3 4 5
| | | | | |
7,500 7,500 7,500 7,500 7,500
8,550
9,747
11,112
12,667
22,430 MIRR = 17.19% (Accept) 49,576
Financial calculator: Obtain the FVA by inputting N = 5, I = 14, PV = 0, PMT = 7500,
and then solve for FV = $49,576. The MIRR can be obtained by inputting N = 5, PV = -
22430, PMT = 0, FV = 49576, and then solving for I = 17.19%.
14%
14%

4. 10-16 a. Using a financial calculator, input the following: CF0 = -190000, CF1 = 87000, Nj =
3, and I = 14 to solve for NPV190-3 = $11,981.99 ≈ $11,982 (for 3 years).
Adjusted NPV190-3 = $11,982 + $11,982/(1.14)3
= $20,070.
Using a financial calculator, input the following: CF0 = -360000, CF1 = 98300, Nj =
6, and I = 14 to solve for NPV360-6 = $22,256.02 ≈ $22,256 (for 6 years).
Both new machines have positive NPVs, hence the old machine should be
replaced. Further, since its adjusted NPV is greater, choose Model 360-6.
Chapter 11
Cash Flow Estimation and Risk Analysis
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
11-4 a. The net cost is $126,000:
Price ($108,000)
Modification (12,500)
Increase in NWC (5,500)
Cash outlay for new machine ($126,000)
b. The operating cash flows follow:
Year 1 Year 2 Year 3
1. After-tax savings $28,600 $28,600 $28,600
2. Depreciation tax savings 13,918 18,979 6,326
Net cash flow $42,518 $47,579 $34,926
Notes:
1. The after-tax cost savings is $44,000(1 - T) = $44,000(0.65)
= $28,600.
2. The depreciation expense in each year is the depreciable basis, $120,500, times
the MACRS allowance percentages of 0.33, 0.45, and 0.15 for Years 1, 2, and 3,
respectively. Depreciation expense in Years 1, 2, and 3 is $39,765, $54,225, and
$18,075. The depreciation tax savings is calculated as the tax rate (35%) times
the depreciation expense in each year.

5. c. The terminal year cash flow is $50,702:
Salvage value $65,000
Tax on SV* (19,798)
Return of NWC 5,500
$50,702
BV in Year 4 = $120,500(0.07) = $8,435.
*Tax on SV = ($65,000 - $8,435)(0.35) = $19,798.
d. The project has an NPV of $10,841; thus, it should be accepted.
Year Net Cash Flow PV @ 12%
0 ($126,000) ($126,000)
1 42,518 37,963
2 47,579 37,930
3 85,628 60,948
NPV = $ 10,841
Alternatively, place the cash flows on a time line:
0 1 2 3
| | | |
-126,000 42,518 47,579 34,926
50,702
85,628
With a financial calculator, input the appropriate cash flows into the cash flow
register, input I = 12, and then solve for NPV = $10,841.
11-5 a. The net cost is $89,000:
Price ($70,000)
Modification (15,000)
Change in NWC (4,000)
($89,000)
b. The operating cash flows follow:
Year 1 Year 2 Year 3
After-tax savings $15,000 $15,000 $15,000
Depreciation shield 11,220 15,300 5,100
Net cash flow $26,220 $30,300 $20,100
12%

6. Notes:
1. The after-tax cost savings is $25,000(1 – T) = $25,000(0.6)
= $15,000.
2. The depreciation expense in each year is the depreciable basis, $85,000, times the
MACRS allowance percentage of 0.33, 0.45, and 0.15 for Years 1, 2 and 3,
respectively. Depreciation expense in Years 1, 2, and 3 is $28,050, $38,250, and
$12,750. The depreciation shield is calculated as the tax rate (40%) times the
depreciation expense in each year.
c. The additional end-of-project cash flow is $24,380:
Salvage value $30,000
Tax on SV* (9,620)
Return of NWC 4,000
$24,380
*Tax on SV = ($30,000 - $5,950)(0.4) = $9,620.
Note that the remaining BV in Year 4 = $85,000(0.07) = $5,950.
d. The project has an NPV of -$6,705. Thus, it should not be accepted.
Year Net Cash Flow PV @ 10%
0 ($89,000) ($89,000)
1 26,220 23,836
2 30,300 25,041
3 44,480 33,418
NPV = ($ 6,705)
Alternatively, with a financial calculator, input the following: CF0 = -89000, CF1 =
26220, CF2 = 30300, CF3 = 44480, and I = 10 to solve for NPV = -$6,703.83.

7. Chapter 16
Capital Structure Decisions: The Basics
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
16-5 a. BEA’s unlevered beta is bU=bL/(1+ (1-T)(D/S))=1.0/(1+(1-0.40)(20/80)) = 0.870.
b. bL = bU (1 + (1-T)(D/S)).
At 40 percent debt: bL = 0.87 (1 + 0.6(40%/60%)) = 1.218.
rS = 6 + 1.218(4) = 10.872%
c. WACC = wd rd(1-T) + wers
= (0.4)(9%)(1-0.4) + (0.6)(10.872%) = 8.683%.
V =
08683.0
)4.01)(933.14($
WACC
)T1)(EBIT(
WACC
FCF −
=
−
= = $103.188 million.
16-6 Tax rate = 40% rRF = 5.0%
bU = 1.2 rM – rRF = 6.0%
From data given in the problem and table we can develop the following table:
D/A E/A D/E rd rd(1 – T) Leveraged
betaa
rs
b
WACCc
0.00 1.00 0.0000 7.00% 4.20% 1.20 12.20% 12.20%
0.20 0.80 0.2500 8.00 4.80 1.38 13.28 11.58
0.40 0.60 0.6667 10.00 6.00 1.68 15.08 11.45
0.60 0.40 1.5000 12.00 7.20 2.28 18.68 11.79
0.80 0.20 4.0000 15.00 9.00 4.08 29.48 13.10
Notes:
a
These beta estimates were calculated using the Hamada equation,
b = bU[1 + (1 – T)(D/E)].
b
These rs estimates were calculated using the CAPM, rs = rRF + (rM – rRF)b.
c
These WACC estimates were calculated with the following equation:
WACC = wd(rd)(1 – T) + (wc)(rs).
The firm’s optimal capital structure is that capital structure which minimizes the firm’s
WACC. Elliott’s WACC is minimized at a capital structure consisting of 40% debt and
60% equity. At that capital structure, the firm’s WACC is 11.45%.

8. Chapter 23
Derivatives and Risk Management
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
23-3 If Carter issues floating rate debt and then swaps, its net cash flows will be: -(LIBOR +
2%) – 7.95% + LIBOR = -9.95%. This is less than the 10% rate at which it could
directly issue fixed rate debt, so the swap is good for Carter.
If Brence issues fixed rate debt and then swaps, its net cash flows will be: -11% + 7.95%
- LIBOR = -(LIBOR + 3.05%). This is less than the rate at which it could directly issue
floating rate debt (LIBOR + 3%), so the swap is good for Brence.
Chapter 26
Multinational Financial Management
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
26-1 $1 = 9 Mexican pesos; $1 = 111.23 Japanese yen; Cross exchange rate, yen/peso = ?
Cross Rate:
Dollar
Yen
Peso
Dollar
× =
Peso
Yen
.
Note that an indirect quotation is given for Mexican; however, the cross rate formula
requires a direct quotation. The indirect quotation is the reciprocal of the direct
quotation. Since $1 = 9 pesos, then 1 peso = $0.1111.
Yen/Peso = 0.1111 dollars per peso × 111.23 yen per dollar
= 12.358 yen per peso.
26-2 rNom, 6-month T-bills = 7%; rNom of similar default-free 6-month Japanese bonds = 5.5%;
Spot exchange rate: 1 Yen = $0.009; 6-month forward exchange rate = ft = ?
)r1(
)r1(
e
f
f
h
0
t
+
+
= .
rf = 5.5%/2 = 2.75%.
rh = 7%/2 = 3.5%.
e0 = $0.009.

9. 009.0$
ft =
0275.1
035.1
1.0275 ft = $0.00932
ft = $0.00907.
The 6-month forward exchange rate is 1 yen = $0.00907.
26-3 U. S. T.V. = $500; French T.V. = 550 euros; Spot rate between euro and dollar = ?
Ph = Pf(e0)
$500 = 550 euros(e0)
500/550 = e0
$0.9091 = e0.
1 euro = $0.9091 or $1 = 1 / 0.9091 = 1.1000 euros.
26-4 Dollars should sell for 1/1.50, or 0.6667 pounds per dollar.
26-8 a. The automobile’s value has increased because the dollar has declined in value relative
to the yen.
b. 245/108 = 2.2685, so $8,000 × 2.1491 = $18,148.00.
Note that this represents a 4.9% compound annual increase over 17 years.
26-9 a. SFr. 1,000,000 (1.6590 $/SFr.) = $1,659,000, or
SFr. 1,000,000 / $0.6028 = $1,658,925.
(Difference is due to rounding.)
b. SFr. 1,000,000/SFr. 0.6075 = $1,646,091, or
FF. 1,000,000 × $1.6460 = $1,646,000.
c. If the exchange rate is SFr. 0.500 to $1 when payment is due in 3 months, the SFr.
1,000,000 will cost:
SFr. 1,000,000/SFr. 0.500 = $2,000,000,
which is more than the spot price today and more than purchasing a forward contract
for 90 days.